Abstract
Whether people perceive and respond to low-probability natural hazards is a research question of considerable policy relevance. We obtain evidence by considering the response of housing choice to tornado risk for manufactured homes. The vulnerability of manufactured housing, combined with its growing share of the U.S. housing market, has led to proposed mandates for community shelters in mobile home parks. Expected utility theory, however, predicts that households should account for tornado risk in their housing choice. We test for an effect of tornado risk on manufactured housing demand using cross-sectional state data, as well as counties in three tornado prone states. We find that people do respond to tornado risk; our estimates indicate that each expected annual state tornado death per million residents reduces demand for manufactured homes by about 3%. The estimated quantity effect is consistent with the market studies of the price elasticity of manufactured homes.
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Notes
The National Weather Service uses the term “permanent homes” to refer to single family homes, duplexes, town homes, and apartments.
The source for all tornado records is a national archive of tornadoes since 1950 maintained by the Storm Prediction Center.
The cross-state correlation between Fatality Rate and Damage Area equals 0.82, which is high enough to consider the two measures compatible but not so high as to cause redundancy.
We also included in specifications not reported here the poverty rate and the Gini coefficient, but they did not attain significance or alter the inferences.
The two artificial regressors are the expectation of the latent index and the generalized residuals. Thus for the uncensored observations the variables consist of the fitted index and residuals from the Tobit model (8). For the censored observations, the generalized residuals equal−σuϕ(δ’W i /σu)/(1-Φ(δ’W i /σu)), where ϕ and Φ are respectively the standard normal density and distribution functions, and σu, δ’W i are evaluated at the Tobit estimates. To compute the expected index for the censored observations, subtract the generalized residual from the fitted index.
Note that the model in column (c) of Table 2 includes two endogenous variables (Fatality Rate and Relative Price), while the matrix W i uses three instruments: median home price, tornadoes per capita, and Damage Area. The model thus imposes one overidentifying restriction. A test of the restriction yields an asymptotic t-statistic equal to 1.01. The test therefore does not reject the instruments.
The estimates omit one exceptionally small Texas county due to incomplete data.
Relatively little is known about the location or severity of tornado injuries. Some rough calculations indicate that under any plausible assumptions the value of injuries is less than 10 percent of the value of fatalities. We therefore focus exclusively on fatalities.
Including the value of the state-median risk brings the full cost to $1,630.
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Acknowledgments
We thank the editor and two anonymous referees for helpful comments. An earlier draft of this paper was presented at the Southern Economics Association meetings. Harold Brooks and Brent McAloney of NOAA for supplying us with the data on tornado fatality locations.
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Sutter, D., Poitras, M. Do people respond to low probability risks? Evidence from tornado risk and manufactured homes. J Risk Uncertain 40, 181–196 (2010). https://doi.org/10.1007/s11166-010-9087-8
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DOI: https://doi.org/10.1007/s11166-010-9087-8